Thursday, 7 October 2010

What are Labour's options on child benefit?

The government may have made a mess of its policy and the communication of its high profile announcements over child benefit. But once we have a shadow Cabinet in place in the next day or so, this high profile issue is one of those to which the Opposition will be expected to respond as it prepares its broader response to the comprehensive spending review in less than a fortnight's time.

There seem to be three broad approaches which the opposition could take on the proposal to cut child benefit.

(i) Accept the principle of removing child benefit from higher earners, but propose a fairer way to do this in practice.

Don Paskini makes this case: that restoring child benefit to higher rate payers would not be a priority for the opposition or the next Labour government. Ed Miliband has warned his party that he will not promise to reverse everything the party does not agree with.

Yet the government's own scheme is a shambles. Labour might therefore propose a different scheme for means-testing child benefit. One option here would include incorporating it into tax credits so as to remove the single/double-earner anomaly. (However, this would then catch some couples with earnings over £45,000 who escape the Tory cut). There might be a range of other different approaches.

Given that the current Conservative scheme is unworkable - particularly with the marginal tax rates it introduces - there is a good chance that an opposition policy of this kind would be supported by government backbenchers, and bring about some modest changes to the policy. It would enable Labour to challenge the government as being both hyper-partisan in wishing to play politics with child benefit by making it a showpiece party conference, yet incompetent in its execution.

However, while Ed Miliband has proposed this type of constructive opposition on some issues, both he and his party - and campaigners on these issues - may be reluctant to do so on an issue which George Osborne and the Conservatives have chosen as a totemic example with which to challenge the idea of a universal welfare state (even while giving contradictory answers about whether that is the intention)?

But when it comes to child benefit which has gone to all families for 60 years in this country - it was a legacy of the Second World War - I think it is really important to support families in this country and I think child benefit is a good way of doing it.

Specifically on child benefit, the "trap" which George Osborne intended to set for Labour has largely been sprung by his own leader bringing the Conservatives' ludicrous marriage tax break back to the centre of debate in response to the row.

This discretionary proposal spends at least 55%+ of the costs of the child benefit change, and it will spend 75%-150% or more of the savings if it is amended to cover higher ratepayers too, as the Tory leader hinted this week. (If they really want to be that daft, Labour could already outflank them on deficit savings simply by opposing both the child benefit change and the marriage break. Some trap!).

Clearly, the marriage tax break £550 million+ must be highly affordable if this deficit hawk government can find the money. So Labour should say that it will reverse the tax break which will go to fewer than 1 in 5 families with children (and a large number of childless couples) and that its own pro-family agenda and instincts means that it would wish to spend any such spare resources in the public finances on children in a fairer way. The Coalition will in any event have to explain why the marriage tax break money would not be better spent on the pupil premium, or on measures to end child poverty (like child tax credits), etc.

However, again, this opportunity does not automatically mean that Labour would be right to prioritise the reversal of the £1 billion child benefit changes. It is true that Labour's deficit reduction strategy will be based on smaller cuts than those of the Coalition, and a different balance of taxation and spending from the 23:77 split the Coalition (perhaps implausibly) seeks by the end of the Parliament. However, that does not avoid the need to identify the broad contours of a coherent deficit reduction strategy of its own. There will still be many other harder decisions over spending and taxation, even if this particular boomerang backfires on Cameron and Osborne.

(iii) Defend the idea and structure of universal benefits, while finding other ways to make some savings on child benefit or from higher rate-payers.

The approach would be to find a different way to raise £1 billion from higher rate taxpayers, either from child benefit itself or more generally.

The banks: Whether the costs of deficit reduction should fall on families or those who got us into this mess is a good slogan and ralling cry. And Labour should certainly propose a tripling of the bank levy - from the 0.04% of bank profits of the Coalition scheme to the 0.15% proposed by President Obama in the United States. (This would be much closer to what the LibDems also wanted). However, there will be an opportunity cost to how to deploy these resources, and this argument can not become a single transferable tax increase to be used every time Labour wants to oppose a spending cut. The child benefit changes are probably not top of the list for these resources.

Progressive taxation: This could mean not only targetting higher earners with children to find these savings. That implies raising £1 billion in higher tax or national insurance contributions for those on the higher rate (which would therefore also be paid by those who would now keep child benefit). This would spread the burden of providing child benefit across all higher rate-payers (and debunk the government's claim that lower earners are unfairly contributing), while avoiding steep disincentives, and would involve the highest earners contributing more. This would be less popular with high-earning single adults and childless couples, but the fairness case would involve protecting child benefit as recognising the additional costs of children. The political question is whether the taboo on higher taxation is changed by the context of this effective tax raid on affluent families.

Taxing child benefit: A plausible option would be to keep child benefit universal, but tax it, based on the income of the highest-earner in the household. This proposal has been made by ippr, who proposed taxing child benefit last December. (See Lawton and Stanley's welfare spending chapter, pages 22-26 of this pamphlet on deficit options; full text available online).

ippr argues that taxing Child Benefit is preferable to introducing a means-test because it would raise the same amount of money - £1 billion - but would keep middle class families in the welfare system. ippr's deputy director Kate Stanley said this week:

George Osborne's proposals go further than even Mrs Thatcher dared to go.The welfare state will only survive if it has the support of the middle classes and Child Benefit is their key payback. If you take away a thousand pounds from families with one child the moment one of the parents earns around £44,000 a year it is a very big step and could seriously undermine the welfare system. But that is not to say that better off families should receive the same level of child benefit as poorer families - which is where taxing the benefit comes in. It is a more graduated and progressive process and avoids the cliff edge that Osborne's proposals will bring in."

Those losing all of their child benefit would now lose 40p in the pound instead. The ippr proposal would mean a one-child family paying higher rate tax would lose £416 a year in the value of their Child Benefit, rather than having the benefit removed altogether. This is a compromise proposal which might well appeal to Conservative and Liberal Democrat opinion too as an alternative to the Osborne plan.

However, if child benefit were simply taxed across the board, basic rate taxpayers lose 20p in their child benefit (from £20 to £16 a week for the first child), though even this proposal would have a tapering effect avoid the very sharp tapers and disincentives to work of the government's scheme.

It should also be possible to avoid this consequence for less affluent child benefit recipients. Since it is taxing child benefit, Labour could also afford to increase its value, seeking to have a broadly neutral effect on basic rate-payers, also increasing the amount paid by higher rate payers (who would lose a little more because of the 'increase', but still keep more than half of what is being lost).

ippr last year modelled a range of proposals in proposing a reform package in a slightly different context: this included increasing child benefit to £22 for all children, taxing it on the earnings of the highest earner, and removing it from 16 and 17 year olds in households above average earnings, funding the changes through proposals about tax credits.

So Labour could look at these and other detailed options for reforming child benefit and tax credits, as an alternative to the crude Tory cut-off point, and the opposition would again be well placed to reallocate the £550-£750+ million of the Tory marriage tax break to help finance the transition.